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February 05: ISM Report Likely To Add Optimism

The ISM report today will likely give stocks the reason to reverse some of the losses from Monday. But the relative dearth of high-impact news over the next few days will likely come in the way of the market's push towards new all-time highs. But that wouldn’t be indicative of a trend reversal, which continues to be driven by broad optimism about the economy and earnings picture. Some Europe related headlines have started getting traction in the market again, but that is more due to lack of news on the home front than a full-blown resumption of Euro-zone concerns.

The overall mood seems to be of optimism, with market participants genuinely happy with how things are shaping up. The favorable narrative notes that potentially problematic policy pitfalls like the 'Fiscal Cliff' and debt ceiling issue have been avoided or deferred for the time being. The U.S. economy is showing signs of health, China seems to be in good shape and even Europe's situation may not be that worrisome notwithstanding the improving poll numbers of Italy’s Silvio Berlusconi. The fourth quarter earnings season currently winding down may not be showing a lot of growth, but that should show up in the coming quarters as the economy's growth momentum resumes. Bottom line, investors seem satisfied that the economic and earnings picture may not be in great shape at present, but the outlook on both counts remains strong.

We have started seeing estimates for the coming quarters and full-year 2013 come down in recent days. But the market is looking for a noticeable ramp-up in earnings growth later this year, particularly in the second half. This reflects outlook for the underlying economy, which is also expected to show much better growth in the second half of the year. The market’s recent positive momentum reflects this happy outlook and will likely not reverse till this view remains in place.

This morning’s basket of earnings reports show a mixed picture, with Archer-Daniels Midland (ADM), Automatic Data Processing (ADP), and Kellogg(K) coming out with positive earnings surprises, while Eaton Corp (ETN) missing expectations. Disney (DIS) and Chipotle (CMG) will be reporting after the close. Overall though, the Q4 earnings season has been good enough, both relative to pre-season expectations and the preceding quarter.

As of this morning, we have Q4 earnings reports from 276 S&P 500 companies or 68.2% of the index’s total market capitalization. Total earnings for these 276 companies are up +2.7%, with 67% of the companies beating expectations with a median surprise of +3.1%. Revenues are up +0.3%, with 62% of the companies coming ahead of top-line expectations with a median surprise of +0.8%. The growth numbers are low relative to historical averages, but the beat ratios and median surprises are inline with what we have been seeing in the typical reporting season.

The ISM Services Index is scheduled for release today at 10:00 AM EST, and is expected to decrease to 55.8 in January after increasing to 56.1 in December and to 54.7 in November.

Zacks Releases7 Best Stocks for 2017

These 7 were hand-picked from the list of 220 Zacks Rank #1 Strong Buys with earnings estimate revisions that are sweeping upward. Their stock prices are expected to rise sooner than the others.

Today, this Special Report will be available to new Zacks.com visitors free of charge.

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